Beverly Hills Bar Association -- Trusts & Estates Section
Litigation Update (since September 18, 2002

California Court of Appeal

Rojas v. Superior Court (10/10/02) (2nd District, Div. Seven, Case No. B158391) The mediation privilege set forth in Evidence Code Secs. 1119 and 1120 covers substance of the negotiations and communications in furtherance of the mediation, not the "raw" factual evidence on which the negotiations are based; non﷓derivative materials, such as raw test data, photographs, and witness statements, are not absolutely protected by mediation privilege and may be discoverable upon a showing of sufficient need.
Petitioners sought production and inspection of material produced by real parties in connection with a mediation held in prior litigation to which petitioners were not parties. The materials sought included raw data as well as a compilation of data prepared for the mediation. Petitioners were the tenants of an apartment complex owned by Trustee of an investment trust. Earlier, Trustee commenced an action against the Developers alleging numerous construction defects and the presence of toxic molds on the property.
In a two tiered approach, the Court opined that, despite the protective language contained in Section 1119, "Section 1120 explicitly states that it does not protect from disclosure evidence solely by reason of its introduction or use in a mediation or mediation consultation. Rather, mediation confidentiality is meant to protect the substance of the negotiations and communications in furtherance of the mediation, not the factual basis of those negotiations. Thus, even if evidence is used or introduced in the mediation, it is not protected." The narrow reading forwarded by the respondent would render section 1120 complete surplusage and foster the evils it is designed to prevent: namely, using mediation as a shield for otherwise admissible evidence. As stated in the Law Revision Commission comments, section 1120 is designed to prevent materials from being introduced in mediation solely to protect them from later discovery or use in litigation.
The Court then turned to the question of: if evidence is not protected, then what guidance may the court use to determine the scope of evidence protected? The distinction lies between the evidentiary material is derivative or non-derivative. Qualified protection exists for work product which is an "amalgamation" of factual information and attorney thoughts, impressions, conclusions. Such derivative material (i.e., charts and diagrams, audit reports, compilations of entries in documents, records and other databases, appraisals, opinions, and reports of experts employed as non-testifying consultants) will be ordered disclosed if denial of discovery would unfairly prejudice the other party or result in an injustice. (Code Civ. Proc., ' 2018, subd. (b); BP Alaska Exploration, Inc. v. Superior Court, supra, 199 Cal.App.3d at p. 1250.) The party seeking disclosure must demonstrate good cause, which involves a balancing of the need for disclosure against the purposes served by the work-product doctrine. (National Steel Products Co. v. Superior Court (1985) 164 Cal.App.3d 476, 490.) Such determinations shall be made by the trial court after a careful in camera review of the materials.


Weingarten v. Superior Court (9/20/02) (4th District, Div. One, Case No. D039959): finding that a defendant may be liable for punitive damages is insufficient, by itself, to compel the production of personal tax returns, but order compelling such production was not an abuse of discretion when defendant's conduct precluded plaintiff from obtaining relevant nonprivileged financial information necessary to support punitive damage claim.
In an action for fraud, breach of contract and fiduciary duty, the trial court found that Defendant was "guilty of 'malice' and 'fraud,'" and stated it would schedule a trial on the punitive damages amount after plaintiffs' counsel had sufficient opportunity to conduct financial discovery. Accordingly, Plaintiffs thereafter requested that the trial court sign an order requiring Defendant to produce specified financial documents, including tax returns, to permit plaintiffs to meet their burden on the punitive damages issues.
There is no recognized federal or state constitutional right to maintain the privacy of tax returns. (See Couch v. United States (1973) 409 U.S. 322, 336-337; Deary v. Superior Court (2001) 87 Cal.App.4th 1072, 1075, fn. 2, 1077-1078.) California courts, however, have interpreted state taxation statutes as creating a statutory privilege against disclosing tax returns. (Schnabel v. Superior Court (1993) 5 Cal.4th 704, 718-721; Webb v. Standard Oil Co. (1957) 49 Cal.2d 509, 513.) The purpose of the privilege is to encourage voluntary filing of tax returns and truthful reporting of income, and thus to facilitate tax collection. (Webb v. Standard Oil, supra, 49 Cal.2d at p. 513.)
But this statutory tax return privilege is not absolute. The privilege will not be upheld when (1) the circumstances indicate an intentional waiver of the privilege; (2) the gravamen of the lawsuit is inconsistent with the privilege; or (3) a public policy greater than that of the confidentiality of tax returns is involved. (Schnabel v. Superior Court, supra, 5 Cal.4th at p. 721.) This latter exception is narrow and applies only "when warranted by a legislatively declared public policy." (Ibid.) A trial court has broad discretion in determining the applicability of a statutory privilege. (See National Football League Properties, Inc. v. Superior Court (1998) 65 Cal.App.4th 100, 106-107.)
Thus, the Court concluded that, although the public policy favoring the confidentiality of tax returns does not give way merely because the information is relevant to prove punitive damages, the balance changes when the defendant, without a valid basis, refuses to comply with legitimate discovery requests that seek nonprivileged financial information. Here, Defendant's conduct not only interfered with plaintiffs' ability to prove their case, but it also undermined the discovery process and the judicial system's ability to ensure an ordered process designed to uncover the truth. These policies, when considered together with the importance of obtaining financial condition evidence to establish a proper punitive damages amount, outweighed Defendant's right to claim the tax return privilege as a basis to refuse to produce highly relevant evidence of her financial condition.


Ninth U.S. Circuit Court of Appeals

Pension Trust Fund of Operating Engineers v. Federal Insurance Company (filed Oct. 1, 2002, No. 0017055) Liability policy issued to ERISA plan administrator, encompassing claims for breach of fiduciary duties, including duties based on "common or statutory law," could not, under California law, be read as being limited to fiduciary duties as defined by ERISA; duty to defend claims made "as a result of" breach of fiduciary duties was sufficiently broad to encompass claims by no﷓beneficiary that it was damaged by breach.